UK Watchdog Fears Voda-Three Merger Will Balloon Phone Bills For Customers

Britain's competition watchdog is worried the proposed merger between Vodafone and Three UK could lead to bigger bills for customers, a view rejected by the companies who see it as a chance to transform the local mobile market with fresh investment.

The Competition and Markets Authority (CMA) has published its provisional view on the union of Britain's third and fourth largest cellular operators. It fears the consolidation would lead to price hikes for tens of millions of users, and possibly reduced service, such as smaller data allowances in contracts.

In its guidance, the CMA also said the merger might impact on Mobile Virtual Network Operators (MVNOs) such as Lyca Mobile, Sky Mobile and Lebara, which rely on the companies with infrastructure to run their own services. As the merger would cut the number of network operators from 4 to 3, this may make it harder for them to secure competitive terms.

The watchdog was similarly skeptical of assertions the move, announced last year, would improve the quality of mobile networks. The CMA said it "considers that these claims are overstated," and the post-merger biz would not necessarily have the incentive to follow through on its proposed investment program.

Potential remedies floated by the CMA range from simply blocking the plans, to requiring the divestiture of certain mobile network assets and spectrum from the conjoined entity. Other remedies under consideration are requiring a commitment to deliver the network investments and pre-agreed non-discriminatory wholesale terms for MVNOs.

Vodafone and Three were quick to respond, issuing a detailed rebuttal that seems to show they anticipated the CMA findings.

The pair say in their joint statement the planned amalgamation is a "once-in-a-generation opportunity to transform UK digital infrastructure with £11 billion ($14.4 billion) of investment," and disagree with some of the findings, claiming the proposal is pro-growth, pro-customer and pro-competition.

In particular, they insist the coupling would not affect their pricing strategy, and the CMA's price rise assumptions are contrary to their business and investment plans. All social tariffs will continue to protect vulnerable users, they claim.

On MVNOs, Voda and Three contest that 90 percent of these in the UK rely on the two big players –  BT/EE and Virgin Media O2 – so their merger would therefore boost competition in the wholesale market by creating a third player with the scale to compete.

"The current UK 4 player mobile market is dysfunctional and lacks quality competition with 2 strong players and 2 weak players. This is reflected in the current state of the UK's digital infrastructure that everyone agrees falls well short of what the country needs and deserves," claimed Three UK Chief Executive Robert Finnegan in a statement.

Expert opinion seems to be largely behind the mobile operators rather than the CMA.

"At first glance, the CMA's concerns make for uncomfortable reading for Vodafone and Three as they battle for approval for their crucial merger," said Kester Mann, Director of Consumer and Connectivity at CCS Insight.

"However, many of these had been outlined previously, notably the potential for higher prices and likely impact on the wholesale market. The main knockback to the merging parties is that the CMA considers claims of superior network quality post integration to be overstated," he added.

Mann said the CMA's willingness to consider "behavioral remedies" such as enhanced network access for virtual operators or safeguards for retail customers, is significant as many had feared that more onerous "structural remedies", such as selling assets might be required.

"I retain my view that approving the merger would be the best outcome for the future of the UK mobile industry. A combined Vodafone and Three can make more efficient investments and push BT and Virgin Media O2 to raise their game too, boosting the market's long-term connectivity credentials."

Telecoms analyst at PP Foresight Paolo Pescatore agreed, saying: "As expected, the CMA focuses primarily on pricing implications for consumers, but focusing only on price ignores the fact that the merger will bring much needed investment across the UK."

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Even if the price increase is to be believed, he added, which the telcos dispute, "It's pence per month and doesn't in any way outweigh the benefits of building the network the country deserves."

Analyst Megabuyte called the findings a "damning indictment" of the merger, adding: What really stands out from the CMA's commentary is the fact that it doesn't actually believe commitments to invest the benefits of the merger into customers / pricing / service quality – suggesting that it instead believes that will simply benefit shareholders. The key pushback from the telcos is that despite the number of MNOs reducing from 4 to 3, this merger does improve competition."

UK union Unite previously claimed the merger between the mobile operators would lead to jobs cuts, and said the deal was simply about "corporate greed".

Stuart McIntosh, the chair of the inquiry group leading the investigation, said the CMA has taken a thorough, considered approach to investigating this alliance.

"We will now consider how Vodafone and Three might address our concerns about the likely impact of the merger on retail and wholesale customers while securing the potential longer-term benefits of the merger, including by guaranteeing future network investments," he stated.

The CMA is awaiting responses to its notice of possible remedies by September 27, and its provisional findings by October 4. These will be considered ahead of the CMA issuing its final report, due by December 7. ®